Global Islamic finance industry to grow 10% in 2023-2024 despite economic slowdown

GCC countries, mainly Saudi Arabia and Kuwait, largely fuelled strong growth in the sector in 2022, S&P says

The Riyadh skyline. In Saudi Arabia, the implementation of Vision 2030 and continued growth in mortgage lending supported the Islamic finance industry's growth, S&P said. EPA

The global Islamic finance industry is expected to grow by around 10 per cent in 2023-2024 despite the economic slowdown, after posting a similar expansion in 2022 mainly led by the GCC countries, according to S&P Global Ratings.

The sector continued to expand in 2022, with assets up by 9.4 per cent compared with 12.2 per cent in 2021, supported by growth in banking assets and the sukuk industry, S&P said in a report on Monday.

GCC countries, mainly Saudi Arabia and Kuwait, spurred 92 per cent of the growth in Islamic banking assets last year.

In Kuwait, this was mainly due to Kuwait Finance House's acquisition of Ahli United Bank. “Over the next couple of years, we expect the latter to convert its conventional activities to Sharia compliance in line with its acquisition plans,” S&P said.

In Saudi Arabia, the biggest Arab economy, the implementation of its ambitious diversification strategy, Vision 2030, and continued growth in mortgage lending supported the industry's growth.

However, in other parts of the world, the Islamic finance industry's growth was either muted or held back by local currency depreciation.

“Structural weaknesses still curb the industry's broader geographical and market appeal,” S&P said.

“We believe that progress toward greater standardisation — in part supported by the digitalisation of sukuk issuance for example — could enhance the industry's structural growth potential.

“At the same time, the increasing focus on sustainability-related themes by core Islamic finance players will create new opportunities for the industry. We expect the contribution of sustainability-linked sukuk to continue increasing in the next 12-24 months, albeit from a low base.”

Sukuk issuance continued to spur the industry's expansion despite slowing issuance volumes overall, the report said.

While sukuk volumes are anticipated to fall again in 2023, it will be at a slower pace than in 2022, with new issuance expected to exceed maturing sukuk.

Global sukuk issuance is forecast to “level off” in the range of $170 billion to $175 billion in 2023, after a 10 per cent fall in 2022 to $178 billion, Moody’s Investors Service said in a research report in March.

Demand for Sharia-compliant financing is set to outpace conventional funding in 2023, driven by strong economic growth and development agendas in key markets, it said.

S&P also said that corporates are likely to contribute to issuance volumes, particularly in countries such as Saudi Arabia, where governments have announced transformation plans.

Issuers with high financing needs, such as those in Egypt and Turkey, are also likely to tap the sukuk market as part of their strategy to mobilise all available resources.

Egypt has established a $5 billion sukuk programme and issued its first sukuk in early 2023 for $1.5 billion.

“We understand that this attracted significant investor interest, with more than $6 billion demand and a 59 per cent allocation to investors from the Middle East and North Africa,” the report said.

However, “lower and more expensive global liquidity, greater complexity related to structuring sukuk and reduced financing needs for issuers (due to fiscal surpluses from higher oil prices) in some core Islamic finance countries” will deter the market, it added.

Meanwhile, the takaful sector will also expand at an annual rate of around 10 per cent, supported by continued nominal gross domestic product growth, the expansion of infrastructure investment and medical insurance covers, and some inflation-related tariff adjustments.

“Fund growth will hinge on the performance of the capital markets, given its structure — around one-quarter equity funds and another 60 per cent money market or sukuk funds,” S&P said.

Looking ahead, the GCC will play a key role in supporting the industry's growth.

“We think that Saudi Arabia's banking system performance will continue to underpin a large portion of the expanding Islamic finance industry. In other GCC countries, growth of about 5 per cent appears plausible in the absence of new major government investment cycles.”

In South-East Asia, the Islamic banking industry is likely to grow at around 8 per cent over the next couple of years, despite an economic slowdown in the major markets of Malaysia and Indonesia.

“Robust demand for Islamic products and services and low penetration, particularly in Indonesia, support this trend. In both markets, we expect Islamic banking to continue to gain market share as growth outpaces conventional banking,” S&P said.

It also stressed that while sustainability-linked sukuk issuance remains limited, this trend will change as issuers try to meet investor demand and core Islamic finance countries seek to reduce their carbon footprint and support the global energy transition.

“Many Islamic finance countries are pursuing strategies to help them transition to greener economies. We believe this indicates growth potential for green sukuk issuance and expect to see greater activity in this space as issuers tap global investor interest,” the report said.

In the past three years, many banks in core Islamic finance countries have also issued sustainability plans, which will further support the sector.

“We therefore expect green products and services for corporate and retail customers will contribute to the growth of Islamic banking assets,” it added.